Shares plunge as summer slump hits service sector

Turbulent times: the sector plummeted against a backdrop of the damaging effect of the riots and diving new orders

Shares were back on the slide today as the UK's dominant services industry took its worst dive in more than a decade last month.

The FTSE 100 index fell more than 2% amid renewed concerns for the UK, and global, economy. By this afternoon, the London index was down 114.06 to 5177.97.

The Chartered Institute of Purchasing and Supply/Markit index was so weak for the services sector that it prompted renewed calls for the Bank of England to do more quantitative easing to shore up demand in the sluggish economy.

Its index, where a score over 50 signals growth, plunged from 55.4 to 51.1 in August, meaning the sector barely expanded.

The shock fall in the CIPS index is the biggest in a single month since the foot-and-mouth crisis of 2001, outstripping even the dive seen in the wake of Lehman Brothers' collapse in 2008.

The latest evidence of slowing growth in a month of market chaos has heightened fears over a double-dip recession and comes as the Bank's rate-setters meet this week. Bill Gross, the founder of bond giant Pimco, has now called for Chancellor George Osborne to row back on deficit-tackling cuts.

The darkening climate for services firms, accounting for around three quarters of the economy, follows slowing construction growth and outright decline for manufacturers in August.

Markit chief economist Chris Williamson said the most recent round of surveys were consistent with a "near stagnation" of the economy during August, providing more ammunition for committee dove Adam Posen who has been calling for more quantitative easing for a year.

Williamson said: "GDP growth in the third quarter could be even weaker than the 0.2% rise seen in the three months to June. CIPS warned that confidence among services firms was at its lowest level for a year, as businesses shed staff and new orders grew at the slowest pace since last February. The rioting which swept parts of the country last month was also bad for business, it added.

Chris Scicluna, deputy head of economic research at Daiwa Capital Markets Europe, expects the Bank to hold fire on more stimulus this week, instead waiting until November's inflation report before deciding whether to embark on more QE.

He warned: "This survey is more evidence that the economy is a lot weaker than the Bank of England has been anticipating. Where is the growth going to come from at the moment? We can't expect consumers to provide any momentum. Manufacturing has faded, businesses are not investing and the eurozone crisis will get worse before it gets better."

Comment: Old Lady needs to print more money

There's a sense of déjà vu about today's dire snapshot of the services industry, which will make uncomfortable reading for the Bank of England's Monetary Policy Committee this week. But circumstances have changed for the worse.

Exactly a year ago, the Chartered Institute of Purchasing and Supply's activity index for services firms also took a sudden dive in August, ringing similar alarm bells. But back then, America's Federal Reserve chairman Ben Bernanke's decision to sanction "QE2" lifted the global mood. Over here, the services sector bounced back in the autumn and, in the event, the UK managed 0.6% growth in the third quarter of the year.

At this year's Jackson Hole conference, Bernanke was far more equivocal about the chances of "QE3". The eurozone's debt crisis has also blossomed from an isolated bailout of Greece to envelop Ireland, Portugal and even Spain and Italy - impeding growth in France and Germany.

Expect no help from the UK consumer, feeling a lot poorer after months of inflation stretching well ahead of wages. This time around, it's the Old Lady which has to ride to the rescue by printing more money.Russell Lynch